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Tuesday, 3 December 2013

Hong Kong still a long way from being an Islamic finance hub

The government has started its latest effort to transform the city into an Islamic finance hub with a proposed new law next year allowing it to issue Islamic sovereign bonds here. This is a grand plan but maybe a little too ambitious.

This is not the first time the government has promoted Islamic finance. In 2007, Financial Secretary John Tsang Chun-wah announced a plan to capture part of the Islamic finance pie, now worth US$1.3 trillion and expected to double by 2017.

But except for several visits to countries in the Middle East to shake hands with local officials, not much has been achieved.

Only Hang Seng Bank has done anything to promote the finance hub idea, issuing a retail Islamic fund in November 2007. By contrast, yuan-denominated retail funds have become a trend and we have seen scores of such funds flowing into the market since Beijing encouraged more yuan products in 2010.

In terms of Islamic bonds, also known as sukuk, no local company has made any inroads here. This has been partly because of tax laws, which means the sukuk would be subject to more tax than conventional bonds. It was only in July this year that the law was changed allowing the sukuk to face equal tax treatment to other conventional bonds.

With the new tax law in place, the government now may think it is time to restart the Islamic finance engine. It is also set to follow the British government, which in October said it would issue sovereign sukuk next year. Investment, like fashion, also has a trend to follow.

This time, at least we will see a big sukuk bond issue as the Hong Kong government, with a AAA credit rating, is the issuer. But whether a government issue will encourage other companies to follow with their own offerings remains a big question mark. The government has already launched the government bond and ibond programme but that has not led to many local companies following suit. The local debt market is still not very active.

Malaysia is the world's largest issuer of sukuk at about US$80 billion last year, representing two-thirds of total issues last year. The sukuk to Malaysia is somewhat akin to H shares in Hong Kong. Hong Kong-based Noble Group last year issued Islamic bonds in Kuala Lumpur. This shows Malaysia is hard to beat as an Islamic finance centre.

Malaysia has a much wider population of Muslims and its investors and bankers understand much more about the rules related to their religion. Hong Kong, with only a few Muslims, will find it hard to compete. The Malaysian government also has education programmes to train bankers and financial experts in Islamic finance. In Hong Kong, there is little Islamic investment-related education or training.

Brokers speculate the Hong Kong government wants to promote Islamic bonds because Beijing wants to have a good relationship with Middle Eastern countries. If that is true, it may be up to some mainland companies to issue sukuk. If not, we do not see how sukuk can really take off here.